CFM Capital Structure & Debt Modeling 3

Question 1

Mezzanine financing is best characterized as:

Accepted Answer

Hybrid financing subordinated to senior debt but senior to common equity

Answer

Mezzanine debt is hybrid capital sitting between senior debt and equity in the capital structure, typically featuring higher interest rates and often including equity warrants as additional compensation.

Question 2

PIK (Payment-in-Kind) interest means:

Accepted Answer

Interest accrues and is added to the outstanding principal balance instead of being paid in cash

Answer

PIK interest allows borrowers to defer cash interest by adding accrued interest to the principal balance, which then accrues further interest, increasing the total amount owed at maturity.

Question 3

The Altman Z-score is primarily used to:

Accepted Answer

Predict the probability of corporate bankruptcy within two years

Answer

The Altman Z-score uses five financial ratios (working capital, retained earnings, EBIT, market value of equity, and sales — each scaled by assets or liabilities) to predict bankruptcy risk.

Question 4

What is a financial covenant in a loan agreement?

Accepted Answer

A contractual condition requiring the borrower to maintain specified financial ratios or metrics

Answer

A covenant is a binding condition in a loan agreement — such as maintaining a minimum DSCR or maximum leverage ratio — that protects lenders by limiting the borrower's financial risk-taking.

Question 5

Net debt is calculated as:

Accepted Answer

Total debt minus cash and cash equivalents

Answer

Net debt = Total Debt − Cash and Cash Equivalents, representing the debt remaining if the company used all available cash to immediately pay down obligations.

CFM - Certified Financial Modeler Practice Test

CFM - Certified Financial Modeler Practice Test

CFM Capital Structure & Debt Modeling 3